Are Counterfeiters Innovators

Are Counterfeiters Innovators

June 28, 2017.

Are Counterfeiters Innovators?

I read an interesting article recently about the long discussed topic of why larger organizations can’t be more like a startup. [1] This topic is often brought up in the context of keeping organizations innovative and open to new markets and ideas outside of the normal focus of that business. But this article was interesting because it put forward a new thought I hadn’t seen in the normal discourse, the idea that startups aren’t bound by the same Iegal constraints of established businesses.

The idea struck me as absurd, what investors would get behind an operation or idea that at the outset appeared to be illegal? The article goes on to illustrate how many companies, including Uber, PayPal, Airbnb, and Tesla all had at least aspects of their business model that appeared to be illegal or at least in a very gray area that ran aground of regulatory restrictions on their industries.

One example the article missed, perhaps because of its age and lack of success was Napster. By developing a user friendly interface that specialized in music files, Napster gave would be consumers of music a taste of what they really wanted in content management; a set of features like platform independence, per track purchase, mobility, and the ability to make playlists. The problem was Napster did this be enabling the general population to become content pirates, clearly running afoul of even the most liberal interpretations of consumers rights to content they owned at the time. The music industry certainly couldn’t support having its content stolen and copied, and Napster was forced to shut down in 2001 amid copyright settlements less than three years from inception.

Yet it took Apple to drag the industry forward into digital distribution two years later rather than an internal industry response. The music industry was threatened because they didn’t know how they could monetize digital sales the way they had with physical media. And the industry suffered greatly for over a decade, with replacement revenues from digital media and streaming services just now reaching levels of the pre-Napster world. But the truckloads of CDs, associated manufacturing and logistics, and other cost structures in the industry have now been revolutionized. Digital content distribution is very high margin, with a higher percentage of revenues going to artists, and spurring on all new industries of content creation and entertainment. The future is very bright for this industry.

So what does this have to do with counterfeiters? Well, I think we can agree that counterfeiting is illegal and dominated by “startups” that can ignore the legal norms of doing business. That is not that surprising. And the technological innovations that have led to widespread outsourcing and high quality manufacturing around the globe are now being turned against the same industries that have benefited from them. Internet distribution of products have accelerated sales, but at the same time opened the door to counterfeit products being sold direct to consumer. Counterfeiters are extremely quick to exploit all these “innovations” to create an opportunity that established companies can’t exploit.
So what can we learn from this? I think the biggest takeaway from previous lessons is that there is no quick fix to the competitive threat. Fighting off the examples given will require a giant shift in how those industries do business. And the innovations of counterfeiters in the last 10 years will require companies to think beyond the simple fixes of applying a hologram or monitoring an online presence. It will require an examination from the ground up of how they source, manufacture, distribute, and ultimately sell to consumers.

In previous articles I’ve talked about the changing threats coming to CPG because of online retailers. [2] We’ve talked about both consumer and inspector led authentication, and the challenges both have. [3] An overall brand protection program that includes monitoring contract manufacturers, distributors, and retailers to gain visibility into the flow of products to consumers is becoming ever more important with the continued growth of counterfeiting. A holistic approach to fight these “innovators” is needed. Companies need to stop thinking about anti-counterfeiting solutions as a standalone effort, and think of the principals of securing supply chains and distribution as they think about the principles of quality, efficiency, and sustainability in their operations.